By Robert Miller (University of South Dakota Law School)
The two principal mechanisms for large corporate restructurings—liability management exercises (“LMEs”) and chapter 11 bankruptcies—have converged around a shared structure. Both feature transactions that are broadly participatory yet distributionally unequal, in which equity sponsors frequently benefit despite their formally subordinate position. The similarity is striking because, unlike the Bankruptcy Code, contractarian LMEs operate without a governing statutory framework. This Article uses the evolution of LMEs as a comparative lens to reassess two of the most consequential and contested features of chapter 11 practice: restructuring support agreements (“RSAs”) and debtor-in-possession (“DIP”) financing.
The early winner-take-all phase of LMEs generated immense deadweight litigation costs. In response, lenders developed cooperation agreements (“co-ops”) to broaden participation in LMEs and deter value-destroying challenges. RSAs serve a parallel function in chapter 11 by consolidating creditor support around a preferred case trajectory. However, the evolution of co-ops demonstrates that RSAs will not be formed without compensating the most powerful parties. Co-ops do not form naturally or ratably; they reward pivotal participants who forgo the opportunity to pursue exclusionary transactions. Importing the wasteful litigation of the pre-co-op era of LMEs into chapter 11 by prohibiting rewards for RSA signatories would be counterproductive. The central challenge for courts is reconciling RSA compensation with bankruptcy law’s vertical and horizontal equity constraints. This Article argues that market-testing RSA benefits—rather than banning them—offers the most coherent solution.
The competitive dynamics of LME financing expose shortcomings in prevailing DIP financing practice. Although third-party private credit lenders routinely compete to fund LMEs, they rarely make DIP financing offers. While incumbent lenders ultimately finance most LMEs, the presence of outside competition materially improves pricing and terms. However, the third-party lenders are not volunteers; they are compensated stalking horses. The same lenders would make DIP financing offers if they had a meaningful opportunity to compete and were adequately compensated. This Article proposes two reforms to import LMEs’ third-party financing competition into chapter 11. First, when an incumbent lender seeks to prime its own prepetition lien through DIP financing, courts should permit competing priming proposals that offer improved terms. Improved terms reduce subordination and strengthen protection of incumbent lenders’ lien rights while also benefiting the bankruptcy estate. Second, third-party lenders whose participation materially improves DIP financing terms should be rewarded with administrative expense claims. Together, these reforms would promote competition, reduce litigation, and align chapter 11 practice more closely with the market realities revealed by LMEs.
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